By Jessica Tasman-Jones and Frederic Lee
This article is brought to you by Agenda, an FT Specialist publication that focuses on corporate boards.
In October the UK made it law that Britain’s largest companies must report their climate-related financial information in line with recommendations from the Task Force on Climate-related Financial Disclosures. More than 1,300 companies were affected when the legislation came into force this month. The aim is to ensure that businesses consider the risks and opportunities they face as a result of climate change.
Directors’ attention has now turned to look at disclosure proposals from the International Sustainability Standards Board, which will build on the work of the TCFD. The ISSB, which will absorb several climate and sustainability standards groups this year, aims to issue the standards by the end of 2022 and wants feedback on the two proposals by July 29.
The proposals are global and are likely to be adopted widely in the UK, says Rich Hall, head of sustainability at RSM UK, the tax and auditing firm.
The International Financial Reporting Standards Foundation, which implements the accounting standards followed by more than 140 jurisdictions, set up the ISSB in November last year. In March the ISSB announced that it would work to create a global set of guidelines for sustainability disclosure.
In the UK, Hall expects large listed companies to be the first to adopt the disclosure standards. Investors will be keen to see the standards extended to the Alternative Investment Market and, ultimately, all groups looking for buyers or investors.
One proposal lays out disclosure requirements related to general sustainability risks and considers the four sustainability "pillars" already used in reporting against the TCFD framework — governance, strategy, risk management and metrics and targets.
The second proposal specifies climate-related risk disclosure requirements. It focuses on companies’ exposure to significant risks and opportunities to determine the effect on enterprise value.
It is important for boards to know that the ISSB is not necessarily making value judgments about company performance, says Elizabeth Dawson, counsel for Crowell & Moring. The aim is to provide investors with transparent, consistent information so they can make comparisons, Dawson says.
Currently companies struggle to identify which framework to use because there is no single reporting standard.
“And we know that investors are increasingly demanding these types of disclosures,” says Dawson, adding that for public companies, there are multiple shareholder proposals this proxy season asking companies to reduce emissions and establish net-zero goals.
The Investment Association welcomes the proposals. “High quality and comparable data on the climate-related risks companies are facing is imperative, especially as investors and companies work hard to achieve net-zero targets,” says Andrew Ninian, director for stewardship and governance at the IA.
Sustainability risks increasingly affect the long-term value of companies, says Ninian, so understanding such considerations is important for shareholders’ investment decisions.
With the core purpose of the ISSB being to meet the needs of investors, Hall says the wider question for boards will be how to communicate effectively with stakeholders.
“With an increasing trend for stakeholders to seek more holistic ESG [environmental, social and governance] reporting beyond purely sustainability considerations, companies will still be left mapping and referencing ISSB disclosures into wider frameworks such as UN SDGs,” he says.
The success of the ISSB standards will depend on whether the group can attract uptake from a sufficient number of companies globally, says Paul Davies, global co-chair of Latham & Watkins’ ESG practice.
The proliferation of mandatory standards worldwide, including in the UK, EU and US, may lead companies, particularly those that operate in a single jurisdiction, to focus on reporting in accordance with domestic regulation rather than a global voluntary set of standards, Davies says.
Emmanuel Faber, ISSB chair and the former chief executive of Danone, the French food company, has committed to making the standards compatible with jurisdiction-specific requirements.
“Let me remind you that these proposals were developed as responses to requests from the G20 leaders, the International Organization of Securities Commissions – the Iosco – and others,” said Faber in a video statement in March.
Following the standards will be imperative for any company that is serious about being seen as a leader in sustainability and eager to ensure that it attracts capital, says Richard Calland, a fellow at the Cambridge Institute for Sustainability Leadership. Investors are increasingly concerned with allocating capital to climate and sustainability-smart enterprises, he points out.
Another set of disclosure standards could risk distracting boards from important strategic work that puts sustainability at its core, says Calland, but he is encouraged by the draft proposals’ focus on strategy.
Forward-thinking companies must contribute to fixing a broken world and place this at the centre of their business model, says Calland.
“This is the company of the future. Sustainability reporting, by focusing minds of corporate leaders on the metrics that matter most, is a useful stepping stone on the journey towards being an active contributor to a thriving economy,” he says.
This article is based on a piece published by Agenda.